Earlier today, the Liquefied Natural Gas Income Tax Act (the
"Bill") was introduced into the British Columbia
legislature. The Bill reflects the culmination of the
Province's goal to introduce an LNG tax framework, which was initially unveiled in February 2014. The Bill
provides for a tier 1 tax rate of 1.5% and a tier 2 rate of 3.5%.
The LNG tax applies to the net income from all liquefaction
activities in British Columbia.
Effective for the taxation years beginning on or after Jan 1,
2017, the tax rate on net income will be 3.5%. During the period
when net operating losses and the capital investment are being
deducted, the tier 1 tax rate of 1.5% will apply and is creditable
against the 3.5% tier 2 tax. In 2037, the tier 2 rate will increase
to 5% of net income. The tier 2 rate set out in the Bill represents
a significant reduction from 7% contemplated in the initial
framework announced in February.
Since the valuation of revenues, expenses and the cost of
capital investment are central to the calculation of the tax, the
Bill provides a special set of rules for non-arm's length
transactions applicable to integrated LNG projects and companies,
however, there is still significant uncertainty that exists with
respect to the application of these rules.
In addition, the Bill establishes a new B.C. Corporate Income
Tax Credit which will be available to any LNG Income Taxpayer that
has a permanent establishment in British Columbia. The credit will
be calculated based on the natural gas acquired for the LNG export
facility and will have the effect of reducing the provincial
corporate income tax rate from 11% to as low as 8%. The Bill also
creates a tax credit in the amount of 5% of eligible expenditures
relating to the restoration, reclamation or remediation of the LNG
In conjunction with the release of the Bill, on October 20,
2014, the British Columbia government tabled the Greenhouse Gas Industrial Reporting and Control
Act, which sets a greenhouse gas intensity benchmark for LNG
facilities of 0.16 tonnes of carbon dioxide (CO2e) for each tonne
of LNG produced. LNG export facilities will have the flexibility to
meet the benchmark either through improving energy efficiency,
purchasing carbon offsets or by investing in a technology fund at a
rate of $25 per tonne of CO2e. An LNG Environmental Incentive
Program will also be introduced that will provide escalating
incentives to help mitigate compliance costs for facilities
emitting anywhere between 0.16 and 0.23 CO2e.
Each of these measures is designed to provide a reasonable basis
to allow discussion and analysis of the various LNG projects to
proceed, at least to the next phase. However neither solves or
deals with other significant issues confronting the LNG industry in
BC - including the pricing and availability of off-take
arrangements, the paucity of skilled labor and the resulting
potential for escalating capital costs, the timing and costs of
obtaining all required regulatory approvals and negotiating final
deals with First Nations, as well as vigorous competition from
potential US Gulf Coast suppliers, not to mention ongoing lobbying
efforts by industry of the Federal government to enhance current
capital cost allowance deductions. We believe it is these issues,
and not just the terms of the LNG Tax, that will ultimately
determine the size, scale and timing of the BC LNG industry.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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